Social Stock Exchange – Emerging Role of CA's
Social Stock Exchange – Emerging Role of Cas
India is a large country with dynamic landscape and 2 nd in population with over 1.3 billion people in the country and with so many NPO’s so much so there is 1 NPO for every 400 Indian’s, even with such abundance, helping people becomes a hassle because of lack of funds and that’s where social stock exchange comes into picture.
Hon’ble Finance Minister Smt. Nirmala Sitharaman as part of the Budget Speech for FY 2019-20 proposed the idea of an electronic fund-raising platform “Social Stock Exchange”, under the regulatory ambit of SEBI?for listing social enterprises and voluntary organizations working for the realization of a social welfare objective so that they can raise capital as equity, debt or as units like a mutual fund.?
Objectives of the Social Stock Exchange:
·??????? Regulated platform that brings together social enterprises and donors
What is social stock exchange?
A social stock exchange is a separate part of stock exchanges where instead of people asking for money to be invested in their business, this exchange is for listing of Non-profit organization (NPO) on stock exchanges which provides an alternative way of attaining funds for the cause its working on. This is a way forward to strengthen social development and innovation ecosystem in the country, through leveraging new impact-oriented funding instruments in the most transparent way. This isn’t first of its kind it is a borrowed concept.
It all began in the year 2003 when brazil announced first of its kind at that period i.e. Social Stock Exchange (SSE) followed by South Africa (in 2006), Portugal (in 2009), Canada (in 2013), Singapore (in 2013), the United Kingdom (in 2013), and Jamaica (in 2019). Out of all seven, only three in Canada, Singapore and Jamaica still exist and are in functioning state. And then came into India, As per the draft of the SEBI report, a Social Stock Exchange may be helpful in rebuilding the the livelihoods of people who are affected during the?COVID-19?pandemic.
On 25 July 2022, SEBI notified the framework for Social Stock Exchange (SSE). This landmark initiative will open a new avenue for social enterprises to finance social initiatives. It will drive greater transparency, professionalism, and efficiency in the sector while ushering in an era of accelerated development.
In this context, the Securities and Exchange Board of India (SEBI) constituted a 15-member working group on a social stock exchange (SSE) in September 2019. India has at least 3.1 million non-profit organizations (NPOs), more than double the number of schools and 250 times the number of government hospitals, according to an estimate in a June 2020 report by SEBI’s SSE working group. Broadly, the idea behind the exchange is to enable NPOs to raise money from the market by registering and listing on the SSE. To do so, NPOs would have to establish “primacy of social impact" as well as demonstrate the measurability of their efforts. At the same time, the SSE would be meaningful for donors and investors as it would enable the use of market instruments for investing in social endeavor’s, offer access to information and allow visibility on the impact of their contributions.
SEBI granted its final approval, on December 27, for introducing Social Stock Exchange (SSE) as a separate segment on BSE.
On December 19, the National Stock Exchange of India (NSE India) received an in-principle approval from the Securities Exchange Board of India (SEBI) to set-up SSE as a separate segment.
The eligible activities include-
- eradicating hunger poverty, malnutrition and inequality
- promoting healthcare, supporting education, employability and livelihoods
- gender equality empowerment of women and LGBTQIA communities
- supporting incubators of social enterprise.
Corporate foundations, political or religious organization’s or activities, professional or trade associations, infrastructure companies, and housing companies, with the exception of affordable housing, will not be eligible to be identified as social enterprises.
According to SEBI's framework, minimum issue size of??1 crore and a minimum application size for subscription of??2 lakh are currently required for SSE.
Minimum Requirements
In September, the market regulator has specified minimum requirements to be met by an NPO for registration with SSE, disclosure requirement for NPOs raising funds through the issuance of zero-coupon zero principal instruments and put in place annual disclosure requirements that needs to be made by NPOs on such exchanges.
With regard to?minimum requirements?to be met by a NPO, SEBI said that NPO needs to be registered as a charitable trust and should be registered for at least three years, must have spent at least??50 lakh annually in the past financial year and should have received a funding of at least??10 lakh in the past financial year.
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In July, the regulator notified rules for Social Stock Exchange (SSE) to provide social enterprises with an additional avenue to raise funds. The framework was created based on the suggestions of a working group and technical group that the regulator formed.
SEBI gave its?in-principle approval?for an SSE to the Bombay Stock Exchange (BSE) in October.
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KPMG in India has contributed to the drafting of this framework and is committed to the cause. As part of our ongoing efforts, we organized a webinar - ‘Decoding Social Stock Exchange’ which aimed to introduce the fundamentals of the framework and discuss the following topics with thought leaders:
What is a social enterprise? Who can register or list securities with SSE? What is the process of listing on SSE? How will listing on SSE help a social enterprise? What are the proposed requirements from social enterprises to manage the project and impact post listing?
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It is important to appreciate that development of social sector involves development of vulnerable segment of society living with limited resources available to them; it also ensures long term sustainable growth of the country. Channeling various funds for social sector development requires trust building among all stakeholders, largely among donors and implementing agencies; this calls for introduction and acceptance of uniform frameworks in reporting, measurement, and standards. The role of SSE in this space is also very crucial.?
The secondary function of SSE might include standard protocols for conceiving, designing, implementing and reporting about social outcomes of any project. Different stakeholders involved in any SSE might include Trading Members, Non-Profit Organizations (NPOs), For-Profit Enterprises (FPEs), Market Infrastructure Institutions (MIIs), Social Auditors, Information Repositories, Regulators, and Investors.
In conclusion, SSEs are a new concept in the global financial market that allows social enterprises to raise capital from investors interested in supporting social causes. SSEs act as a bridge between social organizations and investors looking to support social impact, providing transparency and accountability in funding channels and utilization prospects. SSEs are expected to unlock a large pool of social capital and encourage blended finance structures, allowing conventional capital to partner with social capital to address the concerns and challenges of society.?
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Proposed Mechanism for Fund-Raising in SSE
Social Stock Exchanges aim to effectively deploy fundraising instruments and structure available under specified guidelines. These instruments depend on the nature of social enterprise seeking funding. The instruments are different for NPOs and for-profit enterprises
Instruments for non-profit social enterprises are as follows:
1.????? Zero coupon zero principal bonds:?Allowing NPOs to directly list on the SSE through issuance of bonds in the form of zero coupon or zero principal bonds. This is a feasible option to unlock funds from donors, philanthropic foundations and CSR spenders. These bonds would carry a tenure equal to the duration of the project that is being funded, and at tenure, they would be written off the investor’s books.
"Currently, the regulations have prescribed the minimum issue size as??1 crore and the minimum application size for subscription at??2 lakhs for ZCZP issuance," NSE said.
“For FPE, the process of issue and listing of securities shall be same as applicable for issue and listing of securities under the extant processes of the exchange (based on eligibility criteria for the main board, SME Platform or innovators growth platform, as applicable in addition to the criteria provided to be eligible as social enterprises)," it added.
Now, if a social enterprise raises funds through ZCZP, it will have to do regular audits of its social activities and report them to social exchange for the perusal of all stakeholders.
2. Social Venture Funds (SVF):?An SVF is a category 1?Alternative Investment Fund (AIF)?that is already allowed by SEBI to issue securities or units of social ventures to investors.
3. Mutual funds:?An asset management company could offer closed-end mutual fund units to investors. The units could be redeemable in principal terms, but all of the returns could be channeled towards suitably chosen NPOs by the fund which acts as the intermediary.
4. Pay-for-success models:?Pay-for-success models through lending partners or through grants are highlighted as effective mechanisms to ensure a more efficient and accountable deployment of capital.
For for-profit social enterprises (FPEs):
3.????? Donations through Mutual Fund Schemes [as shall be specified]
4.????? . Any other means that SEBI may specify in future
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Benefits of Social Stock Exchange
Building an ecosystem that will enable the SSE to thrive and flourish in India will give the following benefits:
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Meanwhile, there are over 20 different social organisations registered under the SSE platform of both exchanges. Here are the details:
Social Enterprises
Exchanges
Area of work
Development Management Foundation
NSE, BSE
An educational institution founded to create, strengthen and establish development management
Gramalaya Trust
NSE
Operate in the field of water, sanitation, and hygiene in rural, urban, coastal and tribal areas
Green Age
BSE
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Grey Sim Learning Foundation
NSE
Provide vocational skills and products to increase the employability and productivity of the youth
Krushi Vikas Va Gramin Prashikshan Sanstha
NSE
Aims at the betterment of rural, semi-rural, and diversifying urban communities depending on agri and nonfarm-based activities for their livelihood
Lighthouse Communities Foundation
BSE
Enabling livelihoods for all
Masoom Trust
NSE
Empower, strengthen and transform night schools to empower youth.
Missing Link Trust
NSE, BSE
Engages with the public on the issue of sex trafficking and missing girl child
Mukti
NSE
Help the?poor and distressed across the globe
Opportunity Foundation Trust
NSE, BSE
Avasar Foundation was created to help lift girl children out of poverty through education
People’s Rural Education Movement
BSE
Working for the development of Adivasi (indigenous), Dalit, Fisher folk and other marginalized communities of Odisha and neighbouring states of India
Possit Skill Organisation
NSE,BSE
Support unemployed youth to harness their talent and develop their market-oriented skills
Ratna Nidhi Charitable Trust
NSE
This trust looks at tackling the problems of poverty in Mumbai, especially among young children
Saath Charitable Trust
BSE
Works with the deprived communities and empowers the socially marginalised by providing them livelihood services, and imparts skills
Samvedna Development Society
NSE
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Score Livelihood Foundation
NSE
Empower communities with sustainable and inclusive livelihood options
SGBS Unnati Foundation
NSE, BSE
It is about equipping underprivileged youths and providing employment
Shri JagatBharti Education and Charitable Trust
BSE
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Supporting Association for Thematic and Holistic Initiatives (SATHI)
BSE
Improves the lives of individuals, especially women and children
United Way of Delhi
NSE
Help individuals achieve their potential through education, financial stability, and access to health
United Way Mumbai
NSE
Help individuals achieve their potential through education, financial stability, and access to health
Vatsalya Trust
BSE
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Voice Society
NSE
Voluntary Action Group of Academicians, Professionals and Volunteers who work to raise awareness amongst Indian consumers about their own Consumer Rights
At present, social enterprises — for-profit and not-for-profit entities — can only register on the platform and not raise funds. BSE-registered United Way Mumbai’s spokesperson told?CNBC-TV18, “Within three to four weeks, we were able to register. This period included time to collate documents, get them verified by our Chartered Accountant, submit to SSE and await SSE verification.”
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Benefits to investors
An SSE might encourage individuals and organizations to donate a lot more to NPOs than happens via the corporate social responsibility route today. For instance, the working group has proposed that first-time retail investors be allowed to avail a 100% tax exemption on a maximum investment of??1 lakh in an SSE mutual fund. It has also proposed doing away with the 10% cap on income eligible for deduction under 80G, for donations to NPOs that benefit from the SSE. In a best-case scenario, the SSE would boost both corporate and individual investments in social and ecological projects, two aspects that profit-driven financial markets are weak at addressing but act as a foundation for prosperity. Imagine thousands of Indians enabling hundreds of 1,000-acre forests with local community participation and livelihoods built around local agro-forestry produce and experiences.
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